Sezzle powers ahead with growth – 'the bottom line is not the key'

Charlie Youakim is the CEO of Sezzle, the buy now pay later company based in Minneapolis in the US, which copied Afterpay’s business model of offering customers to pay them back through four interest-free payments over six weeks. It’s almost exactly two years since Charlie was on Eureka Report and since then, its share price has skyrocketed from its IPO issue price of $1.22 to as high as $12 dollars last year and to now sitting around about $8.25, so it’s been a fantastic investment for those who bought in early.

Sezzle recently released its 2020 financial year results which showed enormous growth still in terms of merchant sales in the US and they’re still breaking record month-on-month growth in the early part of 2021. Charlie talks about that and also more broadly on the buy now pay later market in the US and globally.

Here’s Charlie Youakim, the CEO of Sezzle.

Table of contents:
Cash situation
Share price & growth in past year
Merchant & user growth
Increase in net transaction margin
Expansion beyond North America
US buy now pay later market
Competition
Breakeven forecast
Pipeline

Charlie, could we start by looking at Sezzle’s cash position? Because within the last year you had a capital raise and also completed a receivables funding facility, so where does that leave you in terms of cash in the bank right now?

The exact cash balance in our annual report would be the best reference for all investors, but the game plan is still on pace. Our game plan is to utilise that funding from our July fundraise to run for 24 to 30 months, that’s typically how we look at fundraisers as a company. The only reason that might change is if we accelerate based on pace of growth. I think as investors take a look at where our cash position will be over time, the analysis that the investor should be looking at when they’re taking a look at Sezzle is just thinking about that in the back of their mind. We plan for 24 to 30 months from a fundraise, if things are going faster than our expectations, we push down on the gas peddle a bit which shortens runway.

Then, what we like to do in the back of our minds as a management team, is we always like to keep a 12 months’ cushion. That’s how we kind of think about a cadence in terms of scaling the company up and then you always re-evaluate upon new fundraisers as to how much growth potential there is. That’s how you think about the next planning phase, I think, that’s how we think about it. We’re at the very early innings of our sector in terms of where we’re at. And so, I think we’ll be thinking in terms of growth phase for quite some time because it’s really land grab at this point and high growth phase. I think for the foreseeable future, we’ll be following that sort of a cadence.

And then just on that, obviously you’re in a growth situation, but how much cash are you burning at the moment?

It’s right on pace with that game plan, so we raised around $60 million in July, so I think if everyone’s out there thinking about that 24-month timeframe, that’s how you’ll price our cash burn. By the way, if you take a look at our annual report, I think the one thing to consider is, when you’re looking at a quarterly basis, is cash burn looks larger in some Qs based on seasonality of business and that’s just one thing to consider. It’s not an item that I would annualise.

Interestingly enough, it’s almost exactly two years since you last came onto Eureka Report, I think it was April 8^th, 2019, so that was kind of in the middle of when you were ramping up for your IPO. Obviously, a lot’s happened since then including your share price has increased nearly six-fold mainly during the past year. Could you fill us in on what you think the market has seen in terms of the growth you’ve experienced in the past 12 months?

I think they’re extremely happy with it, I think the share price reflects that in terms of, as you mentioned, the share price growing six-fold in that time period. I think we’ve had great feedback from the institutional investors that are long-term investors in our company, they’ve been very happy with the progress and I think more than anything else, very happy with us as a management team as a company in terms of following on what we say that we’re going to do and what our execution plan is. I think that was advice I received very early on – this is my first public company – and the advice I received earlier on was basically just do what you say you’re going to do and only say what you plan to do and if you follow that advice, you’ll have good long-term success as a CEO and with the company.

That’s basically what we try to do as a company, is we don’t want to over-promise, we want to make sure that we set level expectations for our investors that this is what we’re going after and we make sure that we execute on it. I think that overall, the investors that are long-term investors are very happy with our progress, which I’m very proud to say.

Just looking at your 2020 financial year results, one of the key metrics is the merchant fees which make up nearly 81 per cent of Sezzle’s income. That metric was up 267 per cent year on year. Has that been a result of a whole lot of new merchants signing up or changes in fees? What do you put that down to?

It’s really a combination of both merchant growth and user growth. Those are the main factors and we’ve had strength in our merchant fee because we do have a lot of strength with SMB merchants here in the United States, that has been a strong point for us which tends to lead to a higher merchant fee rate on a blended average. I think all of those elements combined have done quite well for us. I would say the most core element to the success is that we’re winning with all stakeholders. We’re making our merchants very happy with our product in the results we provide which keeps them sticky with us and then also it leads to word of mouth morality with other merchants that are joining our platform.

Then on the consumer side, we do so well with the consumers as evidenced by our reviews on multiple reviews platforms that we have a high repeat usage rate. Customers transact with us, they love the product, they love the flexibility, they love the fee forgiveness and the ease of use and they also love the fact that we’re present on so many merchant sites. Because of that, it leads to high repeat usage. What’ll happen, typically we install with a merchant, it’s sticky. At that merchant site, well you get some early adopters joining us and they’ll continue to transact with us and as the months progress, we’ll have more users or consumers at that merchant site that’ll join in.

And so, there’s just these tailwinds in the business that help us. Additionally, I would say that the other tailwind is that when you’re especially strong with e-comm and SMB, is that you’re riding the backs of many entrepreneurs and these entrepreneurs are also growing their businesses at, in some cases, rapidly paces. When you’re working with those partners, you’re also benefiting from their growth as we grow as a company.

I think by the end of December, your report said you’d reached 2.2 million active consumers and nearly 27,000 active merchants. Then you also reported that you had a record month in January this year, so it seems like that positive momentum is continuing into this year. Have you seen that strong month-on-month growth continue into February, March and early April as well?

Well, I can’t speak to anything past what we’ve already reported but I think that’s one thing that’s been exciting about the business. I mean, how many retail companies are you aware of, or retail-centric companies, that have a better January than they did December? I think that really speaks to the growth and in where we are as a company and of course, that makes us excited about the business. I think our goal is to continue to do that because we see ourselves as an early innings type company, so we’re going to continue to push for more and more growth. How do you do that? You just keep on executing well and you keep on adding value and that’s what our team is really focused on, execution and adding value.

You also managed to increase your net transaction margin pretty significantly, it was 0.2 per cent of underlying merchant sales in 2019 and up to 1.4 per cent in 2020. Could you run us through firstly what that’s actually measuring and then how you were able to increase it?

Yeah, our net transaction margin, the largest component of net transaction margin is the merchant fee. Then, subtracting from that, typically cost of processing is one of the largest elements and then our cost of funds and then our net loss rate with our active customers, our customers in general. When we look at that in a transaction margin, our focus is chopping away the easiest wood, I guess I’d say. Where do we have the most benefit from a bit of focus? Our biggest focus areas were – I should say all three, quite frankly, in 2020 – we did our best to reduce our cost of funds, we moved from a line of credit with a hedge fund essentially that was looking for higher returns to a firm like Goldman Sachs.

Now, we’re at a much lower cost of funds with Goldman Sachs. In terms of net loss rate, we’ve done a great job in terms of improving our fraud models and our risk and decisioning models, and then also because of the fact that just by the nature of the product, in order to be a repeat user you’ve got to be current. There’s some business model impacts to reducing net loss rate. All those combined together help us with net loss rate. Right now, I’d say our biggest focus as a company is reducing our cost of processing because that’s the largest cost component for us at the moment and so that’s the area that we think we can do the most benefit by focusing on, that’s how we think about the business.

What I’ve always told investors, is we’re going to look at that, we’re going to look at improving it, but more than anything we’re going to focus on growth. Growth is the most important element, but we want to have improvements with net transaction margin and operational efficiency to show our investors that even though we’re pushing for growth, we’re doing it in a smart way by continually making improvements in efficiencies.

Could you do a bit more into how you’re investing in growth? I mean, you’ve been based in the US but then your report also mentioned you’ve started testing in Europe and then potentially in India. Are there plans to expand outside North America as well?

If those tests prove to be successful, absolutely. That’s really the point for us. I kind of think of it visually like a garden and we had North America doing quite well now, we’ve planted a seed in Canada nearly 20-some months ago at this point and now we’ve got and we’re bearing fruit. Canada’s doing quite well and that is a real market for us at this point. Now, we’ve planted seeds in both India and the EU and we’re basically watering the gardens there and seeing if we could turn those seeds into plants and start to bear fruit. We’re not quite there with either of those markets, but that’s the goal, is that by helping those young firms with advice and technology and capital and guidance, that we can turn those seeds into something really fruitful for our investor base and do it in a way that – what’s nice about it, the way we approach it in this company, it’s very asymmetric rewards. We’re taking very small capital bets on these new markets, but if they turn out they could be massive on the upside. That’s what we like about them, we also just kind of believe as a company that this business model, it’s an international business model, it can work anywhere because it’s a model that you can launch with very little credit information and that allows you to launch in markets like India where you might typically have less credit data and there’s a big opportunity there and if we can launch with light credit data, let’s see if we can take hold. And so, I think that’s what we’re looking at or will continue to look at, is potentially planting more seeds internationally where we think there are some rewards like that, with potential. There also are the things domestically we can do with product additions, enhancements that create new seeds that we can plant for future revenue growth.

We know that the buy now pay later market in Australia here is quite advanced. Could you give us a bit of insight into how you’re seeing it progress in the US though? Would you say they’re lagging Australia at all in terms of awareness and uptake or they’ve caught up?

They’re still lagging. Australia’s two to three years ahead, it always has been. That’s been our viewpoint since the start, since our IPO in Australia, is that we felt that Australia is two to three years ahead, it still is and you can see it in the saturation rates online with buy now pay later. The US is, I think, somewhere around the 1 to 2 per cent in terms of percentage of share of checkout online being buy now pay later, whereas I think Australia is somewhere around 20 per cent at this point. I think in terms of those dynamics, we’re well behind in North America, but everything we’ve seen thus far tells us that we’re on a similar trajectory, which I think tells you that if you had that sort of potential in front of you, that’s exciting.

We’re excited by that potential but we also realise that’s two to three years from now so we’ve got to start also think about planting seeds for expansion. What else can we do when this two to three years and continues out and we’re at 20 per cent saturation in North America? What’s next for us at that point? That’s always how we’re thinking about it. We’re not thinking two to three years as a company, we’re thinking seven to ten in terms of how we’re building the company out, that’s our timeline. That being said, investors that are looking for longer return horizons, I think we’re probably as strong in terms of alignment with what you’re looking for if you’re thinking longer-term.

Just to switch to competition, there’s now 13 buy now pay later companies listed on the ASX, of which Sezzle is the third largest by market cap. What’s your view on how many more can actually viably compete and do you think there’s going to be consolidation to come or there’s going to be a winner takes all sort of environment?

I think it’s not the winner takes all. Our viewpoint has always been that we’re very similar to the card networks and the network effects, if you’re not at a certain scale – and it’s hard for me to say where that scale is, where that cut-off is, but if you’re not at a certain scale where your user base and/or merchant base is not meaningful, then it’s going to be hard to get the next person on board, either from the merchant side or from the consumer side. These businesses are definitely network effects businesses but I don’t feel like they’re the Facebooks of the world type network effects where it’s winner takes all. There’s a middle ground there where once you’re at a certain scale, you’re interesting.

We saw that with the card networks before us. In North America, you’ve got Visa and Mastercard, but you’ve also got Discover and Amex. In some other geographies, there’s three or four or five card networks that have successfully launched and taken hold. I think that’s how we think about where this could go in terms of where you need to be. Consolidation, I think wait and see, we don’t view ourselves as drivers of that. Our viewpoint is that our goal is just to keep heads down, keep on doing right by the customers, keep on doing right by the merchants and our other stakeholders, and if we keep on doing that we’re going to have success. That’s really the way we view it, we don’t view consolidation as a tactic for our company.

At Sezzle you haven’t been shy in the past about the fact that you’ve sort of practically copied Afterpay’s model. Just between the two of you, do you think it’s possible for you both to co-exist in the US in the long term?

Absolutely. The companies in the space are all – maybe to people that are looking at the sector and looking at it quickly, they might think that we’re all the same. I’ve heard that you’re all buy now pay later. If you really study the companies, we’re starting to take certain paths in terms of where we’re headed out in the world, which is good. I think everyone’s creating their different value propositions and their lanes. Our lane is really trying to focus on the customer and financially empowering the customer and viewing ourselves humbly in terms of, we are in the space, we’re happy to be in the space, we’re a perfect entry point to credit for young customers because we’re so safe, but let’s help that customer along, let’s help them build their credit score.

We’ve got a product called Sezzle Up that customers can migrate into over time and that helps them build their credit score because in North America your credit score’s actually quite important to you as a young customer. The young customers in the US, they know that having a good credit score helps them get an auto loan or a home loan or even into an apartment. I think from our viewpoint, that’s the lane we want to take, be the high road player in the space and really focus on helping the customer as much as possible, being the most flexible for the customer. First of all, it just feels good to do the right thing in our viewpoint and we feel like we’re just doing the right thing and that’s a positive for us.

It’s funny that, in my view, doing the right thing is also just good for business. We’ve surveyed our customers and they want this. We’re creating a win-win, which I think is always a goal in business, is to create as many win-wins as possible. For us, it’s the win-win and it’s doing the right thing, doing by our mission, but also doing something that we believe will help us run our business. That’s our approach, everyone is really picking different things that they’re focusing on and I guess I’m really impressed by everyone in the space. There’s a lot of people and a lot of smart people that are picking some interesting strategies and I think many of them can be successful.

Just finally, on competition, we’ve also seen PayPal’s entrance into the buy now pay later market with its pay in four idea and a few of the big banks in Australia have launched interest-free credit cards. Are you viewing these institutions and major companies entering the market as a disruption or more of actually a validation of buy now pay later?

I think it’s more of a validation. I think what’s really going to be the key here is staying power. I think one of the challenges with this business model is we have a lot of good competition in this space and it’s really come down to execution. Like I’ve mentioned in the prior answer, the company’s great at executing. Launching is just not enough. You’ve got to have a product that you execute well on post-launch. I typically think that a launch is like 5 per cent, you’ve got 95 per cent is the execution post-launch. I think that’s what we’ll have to see. I think the exciting thing is that everyone trying to launch into the space speaks to the potential.

It shows there’s a lot of excitement about the space and it’s really going go come down to – we are trying to win, let me say that, we are trying to win but the way I view winning is just winning market share. Because there can be many winners but we want to be seen as the premier in the space and so that means executing to the best of our ability. I always tell our team, I give the analogy of thinking like tennis, we want to be like Rafael Nadal and be the best in our field, but that does mean that we have to have ill-will towards the competitors that enter the space, we can have others in the space that do extremely well. Our goal is just to train ourselves, execute well, so that we can be seen as one of the top players.

We’ve talked a lot about you investing in growth and just looking at your financial reports, you made a loss in 2020 of nearly $22 million US dollars, so that was up from the $13 million dollar loss in the prior year. Do you have any forecast of when you might breakeven or is the focus solely on growth for the short to mid-term?

It’s solely on growth. I think you don’t do fundraising rounds if you’re planning on being cash flow positive, basically, I think you’re making a mistake if you’re really focusing heavily on fundraising when you already have cash flowing into the business that would support your growth. I think over time that transitions as you start to reach market, start to get nearer and nearer to market saturation, which could be years down the road for us, then you start to dial it back a bit in terms of fundraising rounds and the cash flow starts to fuel you more and more, and so I think you’ll start to see transition. I mentioned that if I was looking externally into Sezzle and companies like us, look at percentages. What is the cash flow inflows and outflows look like in comparison to revenues and underlying merchant sales and how does that compare half-year by half-year or year by year?

I think, over time, what you’ll start to see is it’ll start to transition and then you’ll start to get some sort of expectation where Sezzle’s at a point where it’s starting to reach positive territory. I think some of this just happens naturally. We keep on focusing on growth, but we’re also focusing on net transaction margin and operational efficiencies. If you just keep on doing the right things, I think it just starts to happen naturally. You’re seeing this fundraise because our view is that we’re going after it right now and so the bottom line is not the key, the key is making sure that we’re doing the growth in a very efficient way which is focusing on net transaction and margin improvement over time.

Just finally, what’s in the pipeline for the rest of this year? What should investors be looking out for?

I spoke to execution as being a really key ingredient to a company. If you look at our 2020, we’ve launched a lot of new products or product extensions. We launched Sezzle Up, we launched Sezzle Spend, we launched our virtual card program which helps us with our in-store solution. I think those are all launches. I don’t want to do what I say I think other companies fail at, we want to be the company that executes well. I think 2021 is the year of execution for us. We’ve launched these products, we’ve got to execute on them. That’s what I think you should watch for as an investor, how well did we execute on all of these elements that we pushed out in 2020? That’s going to be our big focus, is making sure these products go really well for us.

Great to chat, Charlie, thanks very much for your time.

Thanks for having me, I appreciate it.

That was Charlie Youakim, the CEO of Sezzle.